A Cautionary Tale About Market Share

My colleague John Kirk’s series of posts about Android, iPhone, and the importance–or lack thereof–of market share brought back memories of some fights over share in the PC business. The moral of all the stories is that companies that went after share at the expense of profit were either forced to reverse course quickly or get out of the business.

My favorite example was Texas Instruments, which decided to make a big splash in the laptop business in the mid-1990s. TI was making a nice line of TravelMate laptops (if the name sounds familiar, it’s because it lives on as an Acer sub-brand) but was lost in what was then a crowd of PC makers. It decided to cut prices sharply. This set off a 1996 price war in the industry, but had the desired effect of greatly boosting TI’s market share. It rocketed out of the pack to, I believe, a #3 rank in the market. Unfortunately, it lost TI a couple of billion dollars in the process and within less than a year, the company sold its PC assets to up-and-coming Acer and exited the business.

This was an extreme case, but HP, Dell, and Acer have all played the market share game. Each achieved dominance at the expense of profits. And none has fully recovered from the experience.

And that is why I believe apple’s profits-first strategy is a much better forumla for long-term success

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Steve Wildstrom

Steve Wildstrom is veteran technology reporter, writer, and analyst based in the Washington, D.C. area. He created and wrote BusinessWeek’s Technology & You column for 15 years. Since leaving BusinessWeek in the fall of 2009, he has written his own blog, Wildstrom on Tech and has contributed to corporate blogs, including those of Cisco and AMD and also consults for major technology companies.

I appreciate your support but I also look forward to the staff of Tech.pinions taking me to task, too. Bring it on!

W. van Dam

As my professor liked to say: “Ok … Why?”

The anecdote is certainly nice, but your post is missing the part where you explain, or even state, what makes that profit-first is better than market-share first.

I do certainly agree that as a rule of thumb “profit-first” is better than “market share first”, but better yet is understanding why this is the case, because that allows one to appreciate under what circumstances it is actually not the best solution.

Out of curiosity, did Apple implement a profit first strategy when they first launched the iPod? That was a pretty similar situation, right? Being an entry into an unfamiliar and highly competitive market that was in search for a dominant design. I think they did, but I’m not sure.

Jeremy Taco Patterson

Apple did to the personal music player market with the iPod essentially what it did to the tablet market with the iPad: it dressed it up in an easy-to-use package, made it ÜBER-cool, and built a ton of hype.

Then, they priced it so as they were guaranteed to make a pile of money on each one.

Whether or not they would have lowered prices if they hadn’t been such huge sellers… We’ll never know, though I STRONGLY doubt they would, as Apple has never shown itself to respond to competitor price reductions.

W. van Dam

“it dressed it up in an easy-to-use package, made it ÜBER-cool, and built a ton of hype”

Indeed, on the surface what Apple did with the iPod, the iPhone and iPad could be considered highly comparable: They took a product category that lacked a (strong) dominant design, set out to create one and succeeded.

If you look closer, you’ll see that what they did with the iPod is quite different from what they did with the iPhone and iPod, and much more difficult.

During the first years the iPod hardly was a big success*. In these years they learned as an organization how to establish a dominant design and reap the benefits during the process of scaling up production. And in the market they created the foundation for their well known eco-system.

“Then, they priced it so as they were guaranteed to make a pile of money on each one.”
With the iPod they were just another (nearly bankrupt) company trying to make yet another music player. That must have made a difference to their bargaining position towards suppliers. Also, the 1.8inch HDD never really caught on outside music players. This may have been an bargaining advantage, but probably did not weight up against the lost benefits of production scale. In short, I’m not so certain Apple had such a comfortable margin on the iPod, at least not during the first years.

The question is whether making a direct profit was a requirement from the get go, or whether indirect profit from extra PC sales and brand value were acceptable while they worked to establish the foundation for future products and profits.

I very nearly whipped out my “Angry curse words” reply book, as I have gotten so used to that being the directions all conversations turn when discussing ANYTHING Apple related on the internet these days.

Then I remembered I was on TechPinions, and I realized yours was an articulate, well thought out response that contained very valid points.

Not something I am used to…

Thank you, W. van Dam.

You are right. I hadn’t done a great deal of reading on the iPod and its climb to dominance. I live in Alabama (or that’s going to be my excuse for being THAT far behind anyway) so “we” didn’t even hear about iPods until they had already gained a great amount of popularity (and pretty much 100% market share) elsewhere in the faster-paced areas of the world (read: everywhere except Alabama). Plus, I just wasn’t interested in portable music at the time.

So thank you for your enlightening post. Everything you said makes perfect sense!

W. van Dam

Thank you, and you’re welcome.

It’s indeed always refreshing to come here. I actually rarely bother to comment at the mainstream news sites because it is such a waste of time.

Many thanks to the Tech.pinions team for upholding quality.

Matang_Lawin

You’d have to count the famous “reality distortion field” of the late Steve Jobs to pull this through. This he did with ipod, iphone, and ipad. Plus they were cool products to begin with.

W. van Dam

Indeed, Steve Jobs was the driving force behind the transformation Apple has gone through. But please do realize he had a lot more characteristics that were key to his ability to run Apple so successfully. And lets not forget his remarks regarding the workforce that has taken shape since the early days of the iPod.

Jeremy Taco Patterson

Indeed!

He was the rare people-manager that, when he told you candidly your ideas were crap, it truly served to motivate you to prove to him you could do better, not get angry or bitter about his VERY harsh tongue.

W. van Dam

True*, but I was actually trying to refer to his praise of Apple employees in Isaacson’s book. I should have just listed that reference in my previous post.

* To some extent anyway – those that did grew angry or bitter simply did not stay long at Apple – I think this was also recounted by Isaacson.

steve_wildstrom

A company can afford a market-share first strategy if it is seeking to establish itself in a new market and has other profitable businesses to sustain the enterprise. This was, in fact, the case with TI in 1996. But they went so far overboard with the strategy that the losses jeopardized the core businesses and they had to move quickly to stop the bleeding.

What never seems to work is to put your whole business on the line in pursuit of market share because you lose even if you win. It is simply not a sustainable strategy and it’s very hard to get out of once you have made the plunge.

It’s impossible to say when the iPod became profitable because Apple never broke out the data. When the iPod launched in 2001, there wasn’t much of a market to take share from, so it was a very different situation. Certainly, iPod marketing from the beginning focussed on the superiority of the experience, not price.

W. van Dam

Thanks for your reply. I agree with your points.

To add something to it: Setting boundaries, keeping a close eye on progress, having backup/exit plans at the ready and being ready to actually pull the plug if the set boundaries are crossed are all important elements to project management, particularly if you enter in unknown territory and go for market share first. I’ve seen how failure to pay attention to these points can cost a company quite a bit.

Profit first is such a simple guiding principle. But it gets violated so often (without proper understanding or precautions), on so many levels. Like, what did people expect from Facebook? You’d almost get the idea that going public now was their exit plan for early investors.

steve_wildstrom

Even Apple is not 100% profit-first. I serious doubt the apple TV business is profitable. But it is a small venture that Apple is using to gain knowledge for an eventual all-out push into the TV business. If its not profitable at Apple, it had better be strategic. Huge difference between Apple and Google.